Bold Vision for Big D

For nearly 20 years, the 1 million sq. ft. Mercantile Bank complex has hung like an albatross around the neck of the downtown Dallas office market, dragging down occupancy rates and choking off urban renewal. Situated on Main Street in the heart of the central business district, the four-building complex has sat empty since the late 1980s, when tenants in older properties flocked to the shiny new glass skyscrapers built in Dallas during the market's heyday.

The complex, known locally as The Merc, was developed in the 1930s and includes a 33-story tower. Three different groups have tried to redevelop it over the years — into office space, residential units and even a fashion center. But, faced with exorbitant remediation costs, including about $6 million for asbestos removal and tepid city support, they couldn't make the numbers work.

Enter Forest City Enterprises, a Cleveland-based developer known for tackling complicated urban renovations. In mid-September, city officials approved $70 million in incentives to persuade the company to work its magic in Dallas. Forest City currently is redeveloping five other office towers nearby — the Continental building and the four-building Atmos Energy complex — into residential and retail space.

Of the 32 million sq. ft. of office space downtown, nearly one-third is vacant, but the vacancy is concentrated in obsolete buildings like The Merc. Class-A properties, meanwhile, have only 20% vacancy. Despite some of the lowest lease rates in the market at about $19.50 per sq. ft., the scarcity of an existing labor pool has made it difficult to lure new tenants.

About 3,000 people live in the 2,200 housing units that exist in downtown Dallas. City officials hope to have 10,000 downtown units and about 14,000 residents by 2010.

David Levey, executive vice president with Forest City, says Dallas should aim higher. “We think the city should shoot for 25,000 housing units downtown,” he says. Forest City will contribute about 840 units to the cause. Three of the four Mercantile buildings will be demolished, replaced by a parking garage, retail space and a new 12-story, 150-unit apartment building. The 33-story tower that remains will be redeveloped into 225 apartments. The Continental building will go condo, with 240 units. All are scheduled for completion in about two years. Forest City will then redevelop the Atmos Energy complex into 222 apartment or condo units, Levey says, depending on market demand.

Alice Murray, president of the Central Dallas Association, says anteing up $70 million for the Mercantile project is the boldest thing the Dallas City Council has ever done. “It's a giant leap of faith for both of us. Forest City wouldn't be coming to Dallas if they didn't think the company could find success here.”

If Forest City can get a good enough return on its investments in Dallas, other developers will be lured downtown, Murray says. There are 15 other vacant office towers in downtown Dallas, but no subsidy money left.